4.1 Trade and Trading Blocs

Question 1

What is absolute advantage?

Answer 1

A country’s ability to produce a good or service more efficiently (at a lower cost) than another

Question 2

What is comparative advantage?

Answer 2

When a country can produce a good or service at a lower opportunity cost than another country

Question 3

What are 2 assumptions of the comparative advantage theory?

Answer 3

• Assumes that factors of production are perfectly mobile
• Assumes that goods are homogenous (difficult to conclude advantage between 2 countries if goods cannot be perfectly compared)

Question 4

What are 2 advantages and 2 disadvantages of trade?

Answer 4

• Enables greater consumer choice
• Allows countries to benefit from greater economies of scale
• Can lead to over-dependence, reliance on particular exports or imports
• Leads to structural unemployment (jobs lost to more efficient and competitive foreign firms)

Question 5

What 4 factors influence the pattern of trade?

Answer 5

• Comparative advantage
• Emerging economies (growing countries likely to need importing and exporting)
• Trading blocs and agreements
• Relative exchange rates

Question 6

What is a trading bloc?

Answer 6

A group of countries that come together and form agreements to promote trade and economic cooperation among themselves

Question 7

What is a bilateral trade?

Answer 7

An economic agreement between two countries that aims to reduce trade barriers between them

Question 8

What are 5 types of trading blocs (from lowest to highest integration)?

Answer 8

• Preferential trading areas (PTA)
• Free trade area (FTA)
• Customs union
• Single market
• Monetary union

Question 9

What are 2 aims of trading blocs?

Answer 9

- Trade liberalisation: the removal/reduction of barriers to trade
- Trade creation: trade deal agreements that promotes trade between countries

Question 10

What is a preferential trading area (PTA)?

Answer 10

A gradual agreement where trade barriers e.g tariffs are reduced only on select goods/services between member countries

Question 11

What is a free trade area (FTA) and an example?

Answer 11

Where member countries agree to remove trade barriers with one another, but impose separate trade barriers with non-member countries e.g USMCA

Question 12

What is a customs union and an example?

Answer 12

Where member countries agree to reduce/remove tariff and non-tariff barriers to ensure free trade, while imposing a common external tariff for non-member countries e.g EU and Turkey

Question 13

What is a single/common market and an example?

Answer 13

Where member countries trade freely and impose a common external tariff on non-member countries, while allowing the free flow of factors of production (land, labour, capital, enterprise) between member states e.g EU

Question 14

What is a monetary union and an example?

Answer 14

A group of countries that agree to share a common currency, which means they have a single monetary policy and exchange rate e.g EU

Question 15

What is a multilateral trade agreement?

Answer 15

International agreement between 3 or more countries to lower trade barriers with one another, under the guidelines of the WTO

Question 16

What are 2 advantages and 2 disadvantages of trading blocs?

Answer 16

- Free trade: leads to increased specialisation, increased output, lower prices
- Creates greater access to markets: results in economies of scale

- Loss of sovereignty/independence: no control over monetary and come fiscal factors (problematic during economic hardship)
- Trade diversion: shifts from low to high cost member producer (reduces specialisation/comparative advantage)

Question 17

What is trade diversion?

Answer 17

The shift of importing goods/services from low-cost countries to high-cost countries (mainly occurs when country joins trading bloc or when protectionist policies introduced)

Question 18

What is trade creation?

Answer 18

The shift of importing goods/services from high-cost countries to low-cost countries (mainly occurs when country joins a trade union)

Question 19

What is protectionism?

Answer 19

The use of economic policies to restrict free trade between countries

Question 20

What are the 4 types of protectionism?

Answer 20

• Quotas
• Tariffs
• Subsidies
• Embargos

Question 21

What are 3 reasons for protectionism?

Answer 21

- Protect an infant/sunrise industry: developing industry cannot access economies of scale advantages compared to larger firms, need to be able to build reputation/customer base
- To prevent dumping
- To avoid over-specialization: ensure a country (firms and producers) does not become overly reliant on the export of a good as a change in global markets can harm the national economy

Question 22

What is dumping?

Answer 22

When firms sell their products abroad in export markets at below costs or significantly below prices

Question 23

What are 2 arguments against protectionism?

Answer 23

• Competition & Innovation reduced
• Less Consumer Choice

Question 24

What is a tariff?

Answer 24

A tariff is a tax on imported goods/services which raises the selling price of it within the country

Question 25

What are 3 reasons for a tariff?

Answer 25

- Protect the domestic industry - Improve trade balance - Raise government revenue

Question 26

Describe 3 impacts of a tariff

Answer 26

**- Increased inefficiency in production** (more inefficient domestic firms are now producing compared to efficient foreign firms=welfare loss) **- Domestic income worsens** (consumers forced to pay higher prices, lower consumer surplus) - Domestic firms gain surplus: less competition for domestic firms, producer surplus increases, benefit without improvements to productivity (disincentivises firms to become competitive/efficient)

Question 27

What is a quota?

Answer 27

A physical limit on the goods that can be imported into a country

Question 28

Describe 3 effects of an import quota

Answer 28

**- Domestic employment increases** (producers increase output of goods) **- Domestic consumers are worse off** (must pay higher prices and can only buy a smaller quantity) **- Domestic producers are better off** (they receive a higher price and can sell a larger quantity)

Question 29

What is an export subsidy?

Answer 29

Government financial support given to firms to incentivize domestic producers to export more of certain goods

Question 30

Describe 2 impacts of an export subsidy

Answer 30

- Can worsen government budget - Domestic firms more internationally competitive (can lower price of their output)

Question 31

What is a non-tariff barrier?

Answer 31

A way to restrict trade using trade barriers in a form other than a tariff

Question 32

Name 4 non-tariff barriers

Answer 32

**- Quotas** **- Embargos** (government restriction placed on the import or export of goods to another country) **- Licenses/permits** (governments may require licenses or permits for certain goods to be imported) **- Regulation** e.g intellectual property

Question 33

What is an export quota?

Answer 33

A physical limit on how much of a good can be exported out of a country in a certain time period

Question 34

What is the effect of export subsidies on domestic producers?

Answer 34

- The subsidy lowers the cost of production for producers, meaning they can charge lower prices - This makes them more competitive both domestically and internationally

Question 35

What is the WTO?

Answer 35

An international organization that sets the rules for global trade and disputes resolution between nations

Question 36

What are the 2 main aims of the WTO?

Answer 36

- To promote trade liberalisation - To ensure countries act according to their trade agreements

Question 37

What are 2 possible conflicts of the WTO?

Answer 37

**- Unequal bargaining power** (powerful/developed nations have more influence) **- Controversy over primary products** (developed countries wish to protect domestic farmers so introduce high tariffs, contradicts WTO principles)

Question 38

What is an advantage and a disadvantage of a monetary union?

Answer 38

- Exchange rate certainty (facilitates trade between members as eliminates ER volatility) - Loss of economic sovereignity (less freedom/flexibility to adjust policies or ER e.g depreciation during recession)

Question 39

What are 3 conditions necessary for the success of a monetary union?

Answer 39

- High integration - Flexible labour markets - Similar economic cycles

Question 40

What is a cost and benefit of regional trade agreements?

Answer 40

- Trade creation (improves efficiency and generates higher income) - Loss of sovereignty (lose their ability to set interest rates + monetary policy)

Question 41

What is a regional trade agreement?

Answer 41

A treaty between two or more countries, encouraging free movement of goods and services

Question 42

What is a conflict between regional trade agreements & the WTO?

Answer 42

- RTA shift trade from a non-member with comparative advantage, to a member who does not - RTA members implement common trade barriers on non-members which is the opposite of trade liberalisation (protectionism)

Question 43

Draw: Comparative advantage diagram

Answer 43

Y-axis = Good B X-axis = Good A (Two diverging lines = Country A +B)

Question 44

Draw: Absolute advantage diagram

Answer 44

Y-axis = Good B X-axis = Good A (Two intersecting lines = Country A +B)